Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Four FX charts: USD comeback needs another leg higher to seal the deal
John J. Hardy
Chief Macro Strategist
Summary: The USD remains on the comeback trial and has already broken major resistance today in USDJPY, though that pair may prove a poor USD proxy from here. Rather, we focus on the USD status in other pairs, as well as the fresh struggle in sterling and whether US putting Switzerland back on the currency manipulator list means CHF trades more dynamically.
Despite everything the Fed has thrown after the USD liquidity issue into year-end the USD has bounced back strongly from its week performance into the final days of the year. So far, the comeback has mostly been about the neutralization of the downside momentum in the greenback, but we are now nearing levels at which the USD reversal becomes a bit more profound and suggests an upside breakout is afoot. Three of the pairs we focus on for that eventuality are EURUSD and AUDUSD, in particular, as well as whether the EM bid versus the greenback is ready to fade after an incredible run – no real signs of that as that is something that will likely require a halt to the USDCNY slide and easing of EM and risk appetite bid in general.
USDJPY – not the best USD proxy?
USDJPY is the first major pair to garner headlines as it has cleared the local range resistance of around 109.65 and even the psychologically significant 110.00. In today’s FX Market Update, we noted the risk that the signing and publication of the particulars of the US-China trade deal could mark a near term pivot point for markets, which, if that means a consolidation in risk appetite and the current, unprecedented (at least in recent years) reach for yield, could favour the JPY over the USD even if the latter isn’t particularly weak.
EURUSD – eyeing the next leg lower on a break of pivot levels
Since EURJPY and USDJPY show a great deal of directional correlation, we are more interested in the direction of EURUSD for a view on the USD than USDJPY. By plunging back below 1.1150, the EURUSD reversed the sequence above 1.1200 but has yet to follow through lower, a process that starts with a move below 1.1085 and 1.1066, the two local pivots, though a more profound bear move needs to challenge below the 1.1000 level that found support last November.
EURCHF – cut loose?
Yesterday, the US announced it was putting Switzerland back on the list of currency manipulator list for the first time since 2018, suggesting that the SNB will be far more constrained in intervening against further CHF strength and a possible wake-up moment for the market’s assumptions about the currency’s volatility if the upside pressure continues from here amidst complacency. Another angle on CHF is the SNB’s large equity portfolio of some CHF 180 billion, which saw spectacular returns last year and reminds us that the bank is essentially running a huge. This might explain the total lack of CHF upside during the recent aggravated runup in risk appetite. The key test for this notion would be how the franc behaves in a sharp equity market correction scenario – for now we focus on the technical behavior at the new lows for the cycle (note key USDCHF range levels also nearby around 0.9650).
EURGBP – sterling struggling or not?
Sterling looked ready to struggle to the downside as GBPUSD traded below 1.3000 and EURGBP, shown below, trade toward the top of the recent range – but sterling is hanging in there so far. We have what resembles an upside-down head and shoulders formation here, with a neckline near 0.8600 that we will be keeping an eye on in coming sessions if sterling weakness remains pronounced.
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